Duke Reactor Shutdown Plan Shows Shale’s Sway Over Power

By Julie Johnsson and Jim Polson -
Feb 6, 2013

Duke Energy’s decision to dismantle a Florida nuclear power plant rather than undertake the costliest- ever U.S. atomic repair shows how rapidly cheap natural gas is remaking the U.S. power industry, hastening a shift from traditional fuels such as coal and uranium.

Duke’s Crystal River Unit 3 plant in Florida joins Dominion Resources Inc.’s Kewaunee reactor in Wisconsin as the first to be shuttered in the U.S. because of growing shale gas supplies, serving as signposts for utilities from Japan to Belgium also considering decommissioning reactors. At least four other U.S. reactors are also at risk of early retirement due to new power market economics, said Julien Dumoulin-Smith, a New York City- based analyst with UBS Securities LLC, in a telephone interview.

“The fuel du jour is natural gas,” Florida Public Counsel J.R. Kelly, the state’s official advocate for utility customers, said yesterday in a telephone interview. “I personally believe in fuel diversity. I’m just afraid the costs of new nuclear are going to be prohibitive.”

The question for Duke, the largest U.S. utility-owner by market-value, is whether Florida regulators will allow it to charge the state’s consumers $1.65 billion for its failed investments in the reactor, while boosting the state’s already hefty reliance on gas to fuel its electricity plants.

Consumer Benefits

Florida’s Public Service Commission expects to hold hearings to determine whether Duke’s decision to retire the plant is prudent for customers, Cynthia Muir, a commission spokeswoman, said yesterday in a telephone interview.

Kelly said he will take “a very close look” at Duke’s funding request.

“We’re not going to leave our ratepayer in the lurch,” he said.

Duke’s Chief Executive Officer Jim Rogers is among utility executives who have warned that too much reliance on natural gas puts customers at risk of power price spikes should fuel costs rise, as they often did in years before producers learned to extract it from abundant shale beds in the U.S. and Canada.

“We view gas as the most viable short-term option,” Mike Hughes, a Duke spokesman, said yesterday in an interview. “The costs are low and we anticipate the cost of fuel for the foreseeable future will remain relatively low. Long term, we don’t think you should put all of your eggs in the gas basket.”

Gas Distortion

A shale-fed plunge in gas prices is tilting the power industry toward that fuel, lowering electricity prices and pressuring profits at coal and nuclear generators. At the same time, rising fuel prices and escalating safety repairs are making older, single-unit reactors like Crystal River increasingly difficult to operate profitably.

“Natural gas is really distorting the markets,” Margaret Harding, a nuclear industry consultant based in Wilmington, North Carolina, said in a telephone interview. “These old, small plants, if they get slapped with a lot of capital upgrades, they’re going to be tough to justify.”

Gas has become the cheapest source of power for much of the U.S. with prices that have tumbled 75 percent below the July 2, 2008 peak of $13.695 per million British thermal units.

The all-in cost to produce electricity during the fourth quarter, including operating and capital expenses, was $90.42 per megawatt-hour at a combined-cycle gas plant, $140.13 at a coal-fired plant and $143.29 at a nuclear plant, according to data compiled by Bloomberg New Energy Finance. A megawatt-hour can power about 800 average U.S. homes for an hour, according to the Energy Department in Washington.

No Competition

The trend has prompted utilities to build gas plants rather than a wave of new nuclear behemoths once predicted to follow Southern Co.’s $14 billion construction of reactors in Georgia.

“The market is telling us that right now, nothing can really compete with natural gas unless it’s renewables that are loaded with subsidies,” Samuel Brothwell, senior analyst with Bloomberg Industries, said in a telephone interview. “The challenge here is that natural gas can be a great power plant fuel, but it can’t be the only power plant fuel.”

Florida already uses gas for about two-thirds of its electricity generation and risks becoming overly reliant on a fuel whose price has swung from $2 to almost $15 per million Btus and back to $2 since the early 2000s, according to Brothwell. Florida’s dependence would rise to more than 70 percent later this decade if Duke builds new gas generation to replace the crippled Crystal River reactor and two coal units in central Florida, he said.

‘Humpty Dumpty’

Florida regulators may still prefer relying on historically volatile gas to spending billions of dollars repairing a reactor nicknamed “Humpty Dumpty” for its cracked containment shell, with no guarantee the plant will ever run again. Crystal River’s federal license expires in 2016, and gaining a 20-year extension from the U.S. Nuclear Regulatory Commission isn’t assured even after repairs.

“I understand their decision,” said Kelly, Florida’s consumer advocate of Duke. “If they’d decided to repair it and it couldn’t be relicensed, ratepayers could have been on the hook for a lot more money.”

Duke acquired the 36-year-old reactor when it bought Progress Energy Inc. last year. Duke’s board ousted then-Chief Executive Officer Bill Johnson hours after acquiring his former company partly out of concern he was determined to repair Crystal River.

Cracking Up

The silo-shaped concrete building that houses the plant’s 860-megawatt reactor cracked in 2009 as crews replaced steam generators, huge pipe assemblies that transfer heat from the nuclear reactor to power-generating turbines. Once the damaged panel was patched, two other sections cracked after engineers tightened steel tendons intended to strengthen the structure.

A company report last year concluded fixing the reactor may cost $1.49 billion, which would be the largest-ever insurance claim for a U.S. reactor, and as much as $3.43 billion in a worst-case scenario that contemplated cracking spreading to its dome. Duke said it’s considering a new natural-gas fueled plant to replace the reactor’s output.

“Gas is the fuel and technology of choice right now,” Hughes, the Duke spokesman, said. “It was one of the very important factors considered in the financial implications of repair or retirement.”

Most investors had expected Duke to close Crystal River, so the announcement clearing away uncertainty “can be read positively for the company and the stock,” Daniel Ford, a New York-based analyst with Barclays Capital Inc., said in a research report yesterday. Duke declined 0.4% to $68.64 at 11:15 a.m. in New York.

Economic Reviews

Like Dominion’s Kewaunee plant, generators in greatest financial distress have a single reactor and sell electricity into deregulated markets where demand is unchanged, cheaper power sources are abundant and payments from end-users are too low to cover rising fuel and maintenance costs, said Dumoulin- Smith of UBS.

While Duke’s crippled reactor is owned by a regulated utility, enabling it to recapture costs through state-approved rate increases, the other plants are operated by Exelon Corp. and Entergy Corp. in competitive markets where capital spending is funded by power sales. Dumoulin-Smith says Exelon’s Clinton plant in Illinois and Ginna in upstate New York, and Entergy’s Fitzpatrick and Vermont Yankee plants are at greatest risk of being closed, and would almost certainly be replaced by gas.

“We are doing everything we can to continue to operate Clinton and we have made no decision to shut down the plant,” Joe Dominguez, a senior vice-president at Chicago-based Exelon, the largest U.S. nuclear operator, said in a telephone interview yesterday. “With that said, we do an analysis of every one of our plants on an annual basis to understand their continued economic viability.”

California Reactors

Edison International, which owns California’s second- largest regulated utility, is working with regulators to determine whether it can safely and cost-effectively restart two reactors at its San Onofre atomic station near Los Angeles, shut down for a year because of a leak stemming from unusual wear to its steam generators.

Entergy, based in New Orleans, believes that over time power markets will recover sufficiently to support nuclear plants outside regulated frameworks, Mike Burns, an Entergy spokesman, said in an e-mail.

“We think that nuclear plants will remain an important part of America’s generation portfolio,” he said.

Shuttering more reactors would leave generators and consumers even more dependent on shale drillers and the gas they produce, said David Herr, a managing director with investment bank Duff & Phelps.

“The risk is we’re putting all of our eggs into that one basket: the shale phenomenon and our ability to generate a tremendous amount of lower-cost fuel,” Herr, who heads the firm’s energy and mining practice, said in a telephone interview.